PETALING JAYA: The International Monetary Fund (IMF) praised local policy makers for successfully mitigating the harsh external economic climate, bringing about sustained growth in the first three quarters of 2012 and bringing headline inflation down to a welcome low of 1.3% last September.
Growth was primarily driven by domestic demand supported by improved sentiment and fiscal transfers to low-income households, as well as investment growth in the private and public sectors.
The IMF, in its Malaysia: Financial Sector Stability Assessment report, forecast that improving exports would help the economy expand 5% this year, in spite of the uncertainties of the coming general election.
The report highlighted the capitalisation and profitability of banking institutions, evidenced by significant improvements of asset quality in the last five years.
The IMF relied on stress tests indicators to determine the banking system's resilience to economic and market shocks, and concluded that smaller banks and liquidity would be a potential vulnerability, given banks' reliance on demand deposits.
The report also stated that pre-emptive measures taken by Bank Negara included reductions in the Policy Rate, extension of access to the central bank's standing facility to insurance companies, a temporary reduction of the Reserve Requirement and the extension of a Government Deposit Guarantee (GDG) on all local and foreign currency deposits.
Although total government debt as at December 2011 stood at RM456bil (52% of gross domestic product), IMF credited the Government for the development of its bond market, which had a market turnover of 2.5 times a year comparable to regional peers.
Concerns over the household debt were raised, as it was now the highest in the region. House prices in urban areas had also spiked.
Bank Negara took recovery measures, revising eligibility requirements for credit cards in 2010, and tightening its lending conditions based on the loan-to-value or LTV ratios on mortgages.
The Federal Government also reintroduced the Real Property Gains Tax for housing disposals within five years of purchase, which was further raised in January 2011.